Benko: Monetary House Built by Nixon Should Go

While Republican presidential candidates were trading jabs on TV late last month, Sen. Charles Schumer (D-N.Y.) was stealing what should have been the Republicans’ fight plan.

Schumer, ever alert to the media possibilities, joined with three Senate colleagues to refocus attention on China’s currency manipulations and the resulting injury to American exports.

The Republican presidential aspirants have a short memory. In the last cycle, the most powerful independent political ad, one that went viral with more than a million YouTube views, was titled “The Chinese Professor.” A near-future Chinese professor asks, “Why do great nations fail?” and concludes, about America, with a smirk, “So now they work for us.”

Schumer and Sens. Olympia Snowe (R-Maine), Lindsey Graham (R-S.C.) and Sherrod Brown (D-Ohio) made headlines for introducing a variation on legislation they have long advocated to punish China for protecting its manufacturers behind a currency wall created by undervaluing the renminbi.

The ever-crafty Schumer gets the problem even though his approach — escalating to a currency war and flirting with trade war — is dead wrong. Unfortunately, Republicans have been slow to develop a legitimate game plan, just as they have been slow to understand that the solution to America’s economic woes cannot be achieved with fiscal policy — tax and spending — reforms alone.

Equally if not more critical is fundamental reform of America’s monetary structure, which has been mishandled with almost criminal negligence by our elected officials since President Richard Nixon infamously closed the gold window in August 1971.

My colleague Lewis Lehrman, chairman of the Lehrman Institute, also gets the problem. In a recent article in the American Spectator, Lehrman wrote that the monetary policies of China and the U.S. have made China into “a financial colony of the United States, a colony subsidized and sustained by the pegged, undervalued, yuan-dollar exchange rate. Neither the United States nor its economic colony seems to understand the long-term destructive consequences of the dollarization not only of the Chinese economy but also of the world monetary system.”

In a unique deconstruction of the paradox of the Chinese-American trade dilemma, Lehrman compared it to “the historic colonial financial arrangements imposed by the later British Empire on India before World War I — India actually remaining a financial colony of England long after its independence in 1947. ... Changing this relationship is vital for both the U.S. and China.”

For one thing, he noted, China’s accumulation of U.S. dollars is “a massive mortgage on the work and income of present and future American private citizens.” (The “Chinese Professor” problem.)

Lehrman’s article promptly went viral and was widely reprinted in Accra, Ghana; Tehran, Iran; Mumbai, India; London and even Moscow, in Pravda.ru.

But the threat posed by Chinese monetary and trade policies has still not made it to Washington, D.C., the center of the debate over the destiny of America’s future. Dollar policy is a critical, if neglected, issue, one that anyone who aspires to the presidency needs to master.

Regrettably, the lobbyists for American businesses also do not really grasp the problem. Ever anxious to preserve and expand relationships with their sensitive Chinese hosts, these lobbyists quickly dismissed the potential effect of the Schumer legislation and said the key was getting China to play nice with expanding imports from U.S. manufacturers. That is, at best, a sorely naive formula.

The Chinese, because of a demographically toxic “one child policy,” are facing catastrophe. The Chinese dependency ratio is on a relentless course to severely invert — far too few workers to support too many retired elders — and is notoriously in a “race to get rich before it gets old.” There is an edge of desperation to the way that China is gaming our rules.

But the gaming is bad both for China, where its policies are blowing up a bubble, as well as for America. It is bad for the relationship between these two historically friendly nations.

Americans instinctively understand that China doesn’t play fair with the renminbi. But America, not China, made, and makes, the rules that China is gaming. The “monetary house that Nixon built” badly prejudices both America and China. America gets all the toys in the world, cheap, and China gets all the toy factories, jobs and trillions of dollars.

Under the current system, these trillions of dollars simply are automatically reloaned to the U.S. Treasury. This misallocation of capital deeply prejudices our private sector, finances wasteful runaway federal spending and turns both the American and Chinese people into slaves of a grotesque caricature of monetary policy.

Republicans should not be demanding punitive trade measures. That’s flirting with a shameful formula for a new world depression. Republicans, both on the Hill and in the presidential contest, should be screaming to end the reserve asset status of the greenback.

Republicans should be demanding a real, not phony, solution: the restoration of the kind of neutral reserve asset recently called for by Nobel Laureate Robert Mundell, the original architect of Reaganomics, one founded on something that is “nobody’s liability” and “has a strength and confidence that people trust.”

It is time for Republican presidential candidates to stop cracking jokes about their neighbors’ dogs and start making proposals about America’s trade and monetary policies. It is time for Washington, as already is happening in Accra, Tehran, Mumbai, Moscow and London, to examine the implications of the Lehrman analysis and to consider tearing down and replacing “the house that Nixon built.”

Ralph Benko is senior adviser on economics for the American Principles Project.